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These Millionaire Brothers Could Doom PayPal

PayPal is still solving a problem that's 15 years old. That's not where the opportunity lies.

eBay(NASDAQ:EBAY) recently announced that it will spin-out PayPal into its own company. PayPal no longer does the majority of its business with eBay's marketplace, and its ties to the e-commerce giant may be holding it back. Cutting those ties could be the key to continued growth at the peer-to-peer payments specialist.

Perhaps, however, eBay is selling high on PayPal. The phenomenal growth in digital payments during the last 15 years has been extremely beneficial for PayPal, but it's also spawned a wealth of competitors and new start-ups working to solve problems in e-commerce and digital payment processing.

One start-up that's found success in the new world of digital payments is Stripe, founded by brothers Patrick Collison, 26, and John Collison, 24. Both were millionaires before the age of 20 after selling a previous start-up. So, why is Stripe such a threat to PayPal?

Source: Stripe.

An old solution for a new problemPayPal gained popularity 15 years ago because it solved a major problem in eBay's online marketplace. Before PayPal, auction winners sent money orders via mail to sellers, and faithfully waited for sellers to ship their items. PayPal provided fraud protection and expedited the payment process. Additionally, it made it easy for anyone to sell items online -- no merchant account necessary.

Moreover, PayPal enabled peer-to-peer payments, so sending money to friends or family became quick and easy. This feature enabled PayPal to quickly grow a network of users, and collect lots of payment information.

PayPal is an excellent solution to peer-to-peer payments; but, as Ben Thompson points out, PayPal's legacy business is holding it back from providing the best solution for today's e-commerce. Because PayPal is so intent on collecting usernames and bank accounts, it's unable to easily enable a smooth purchase process for small merchants.

As Thompson notes, a merchant using Stripe is able to quickly collect credit card information and complete the transaction. PayPal requires the user to leave the site, log-in to PayPal, select a payment method, then complete the transaction. PayPal has tried to remedy that problem by acquiring Braintree, which provides similar services to Stripe, and also makes the peer-to-peer payment app Venmo.

Source: Apple.

Offline, the problem is even worse. PayPal doesn't offer a solution that's in any way better than swiping a credit card -- it's not faster, safer, or less expensive for the merchant. Attempting to apply the model where users log-in via a mobile app and select a payment option to in-store payments has been a failure so far. Now, Apple(NASDAQ:AAPL) seems to have bested the credit card -- faster, safer -- with Apple Pay.

Front end or back end?After announcing Apple Pay, Apple provided a list of back-end payments solutions for developers to use with the mobile payments platform. Noticeably absent from the list was PayPal's Braintree. Facebook(NASDAQ:FB) and Twitter also chose Stripe as the payments back end of choice for their buy buttons.

Facebook's buy button. Source: Facebook

Braintree's product isn't necessarily inferior to Stripe's, but its ties to PayPal will limit it, just as PayPal's ties to eBay have limited it. Apple Pay will compete directly with PayPal in mobile payments. Facebook is looking to get into peer-to-peer payments via its Messenger app and compete there. Why would these companies want to support their competitor's product?

Stripe's sole focus is on enabling websites to transact business. It's not building a network, and it's not creating a consumer-facing product; it's just facilitating online commerce.

Currently, only 6.4% of retail commerce takes place online, so there's plenty of room for others to compete in this space. That means we'll probably see more consumer-facing products like those from Apple and Facebook. The result is more competition for PayPal, and more business for Stripe. And while PayPal also offers the back-end solution -- through its flagship product and through Braintree -- it's standing in the way of its own success.

Payments disruptedIt's not that PayPal is a bad business. Its 150 million active users show that it still has value in the peer-to-peer payments business. But when it comes to how digital payments have evolved during the last 15 years, PayPal has handcuffed itself to its old business. When a new small business wants to sell things through its website or app, the user experience, and merchant experience, is vastly superior using something like Stripe.

To its detriment, PayPal will never ditch its old business -- requiring accounts and log-ins -- for something anonymous like Stripe. As such, PayPal's future opportunity with merchants is extremely limited.

Author

Adam has been writing for The Motley Fool since 2012 covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St. Louis Cardinals mania ... Follow @admlvy